​We have noted (08/02/21, 08/10/21) that Samsung Display (pvt) has been developing an alternative method for OLED material deposition that would allow the production of RGB OLED displays on Gen 8 production lines.  The Samsung project has been in partnership with Ulvac (6728.JP) in terms of the deposition tool itself, essentially the heart of the process, but other tool vendors have also been developing equipment that would become part of the Gen 8 RGB OLED process and Samsung Display is not alone in trying to develop a Gen 8 RGB process deposition tool.  LG Display (LPL) has also been working toward the same goal, working with Sunic Systems (171090.KS) to adapt the process to the larger substrate format, and Dai Nippon Printing (7912.JP), the largest supplier of the FMM (Fine Metal Masks) that are what patterns the OLED material, has been developing larger masks that can be used in the new process.
Typically FMMs are limited to Gen 6 fabs or smaller as the masks begin to sag when they are larger than Gen 6.  This makes it impossible to produce patterned RGB OLED display on fabs above Gen 6, which limits the efficiency of the process.  By changing the orientation of the deposition tool from horizontal, where gravity works against the FMM to vertical, the mask size can be increased without losing the precise material alignment that the masks provide.  Since using FMMs has been the basis for the RGB OLED process, this would allow the industry to become more cost efficient without relying on new processes such as ink-jet printing and would give Samsung Display a way to directly compete with LG Display in the OLED TV space, without the compromise of using OLED materials and a color filter, which reduces brightness.
We have seen a number of other ‘vertical’ OLED process equipment but the most developed seems to be from OLEDON (pvt), a South Korean company that has been developing the technology along with a process that transfers the materials from a donor film that is pulled into the chamber via a belt.  However that process, while it allows for large substrates, is applicable to ‘open mask’ displays, such as LG Display’s OLED TVs and does not ‘pattern’ the material, which is SDC’s objective.
While we expect none of the OLED panel producers that are developing such process technology have fully committed to same, those decisions will likely be made after pilot lines are put into operation, likely next year.  If successful, product from the technology would likely become available 12 to 16 months later as production space is converted from existing or idle Gen 8 LCD production to V-OLED (Vertical OLED).  Again, if successful, this would have a significant impact on the large panel OLED space and would be a boon to the OLED industry as a whole, expanding large panel OLED production and making large panel OLED more price competitive against other existing or potential display technologies.

​The display glass business is an unusual one, with a small number of suppliers providing the bulk of the substrate material for major panel producers.  Corning (GLW) is the leading supplier, competing with Asahi (5201.JP) and NEG (5214.JP), while a number of smaller suppliers such as Schott (pvt), IRICO (600707.CH), Avanstrate (pvt), and Dongxu (000413.CH), fill in more specialized products.  Panel suppliers have established long=term relationships with primary display glass providers, with a number of glass production sites co-located with display panel fabs.  Corning has well-known relationships with Samsung Display, BOE (200725.CH) and a number of other producers, but the primary display glass supplier to LG Display (LPL), has been Paju Electric Glass (pvt), a joint venture between LG Display and NEG.
While we expect Corning has always supplied some glass product to LG Display, the NEG relationship has been a long one and gives LG Display a mechanism for matching new product production timelines to glass substrate production.  But as the display industry becomes more segmented and specialized, alternative suppliers have a chance at entering the display supply chain for major producers, and while they rarely are able to meet the volumes that top panel producers need for more generic products, they are certainly able to provide product for those more specialized display products. 
In LG Display’s case, they have been using two smaller display glass suppliers for their automotive displays, China’s Tunghsu Optoelectronics aka DongXu, and local firm, Tovis (051360.KS) and while we expect the automotive display business is a relatively small one compared to the TV, IT, and mobile display businesses, it carries high margins and is therefore a focus for panel producers who are always working against declining panel prices and tight margins.   According to Korean press, it seems that Corning has been able to insert itself into the LG Display automotive display supply chain and capture ~10% of the automotive display substrate business from the existing suppliers by offering pricing below that of the two smaller competitors.
This is significant in that it gives Corning another possible entry point toward establishing a larger relationship with LG Display, and while it is a small step, if LG Display grows its automotive display business, Corning has a backdoor to gaining some ground at LGD.  We don’t think this ‘incursion’ will lead to a change in LGD’s primary relationship with NEG, but it seems that Corning’s impact is being felt by Dongxu and Tovis, with the later already seeing a drop in sales to LGD’s parent LG Electronics (066570.KS) as they have recently shuttered their mobile phone division.  With Corning’s array of glass products it is hard to imagine that once the door is opened, they won’t push further in.

​While Corning is making some headway at LG Display, the battle between Corning and Schott for Samsung Display’s new foldables seems to be going Schott’s way.  Schott has been the incumbent in Samsung’s previous foldables but was facing significant competition in the UTG (ultra-thin glass) space from Corning, along-time supplier to SDC.  The new version of Samsung’s Galaxy Fold series (see above) has been developed to use the S-pen writing stylus, formerly used on Samsung’s Galaxy Note line.  As the stylus touch system adds a bit of thickness to the device, it seems that SDC has chosen Schott’s 30um UTG over Samsung’s 50um UTG for the new devices to compensate for the added thickness.  Corning’s UTG would have had to be thinned, post production, to bring it to the same size.
While this means that Schott will supply the majority of the glass for these two new devices, there is still the question of cover glass, which in the case of the Fold 3, must also be able to protect the display from stylus pressure.  While we do not know yet know who the folded cover glass provider is or whether a plastic cover has been used, we know that Corning’s Victus (Gorilla Glass) is being used for the back of the Fold 3 and the Flip 3.  More to come.

​Taiwan based LCD panel producer Innolux (3481.TT) indicated that while the ongoing chip shortage and a tightening of substrate glass supply would cause the industry to see reduced panel production, they remain cautiously optimistic about the 2nd half.  Innolux management indicated that a glass substrate supplier would be cutting its utilization by 15% to 20% in order to do annual maintenance, tightening what has already been a tight glass market, and would lead to the reduction in panels being produced during the 3rd quarter.  Their take on the 3Q panel squeeze was that the reduction in panel production would reduce supply and avoid a glut, although the company had not mentioned that an oversupply situation was a possibility in the past.  Singling out IT products as the area where there was an imbalance between supply and demand, they indicated that the reduction should ease those concerns.
As we have noted a number of times in the past, LCD panel producers have been shifting production away from large panels (TV), where demand has weakened, and moved to IT products, meaning monitors, notebooks, and tablets.  While logic holds that panel producers would follow those areas with the highest profit potential, capacity has increased relatively quickly while demand has stayed relatively flat, especially if one accounts for the potential component shortages that have limited deliveries or pushed out dates.  This has caused buyers to ‘enhance’ ordering a bit by increasing numbers to encourage allocations and meet quotas despite possible shortages.  As brand inventories get closer to real quotas, those orders become more realistic and panel producers are left with excess capacity, a situation they have not faced in over a year. 
The TV panel space is already seeing some panel price weakness, however the IT space, where the capacity shift has been the greatest, has seen only less aggressive panel price increases and has yet to see real panel price declines.  While the annual maintenance period during August is not unusual for glass producers, given the tight market and the high level of production at all of the glass producers that maintenance cannot be avoided and some shortages above the recent norm might be seen, but we have a hard time seeing this scenario as a glass half full one, rather than one indicating the potential for change., But then we are not sitting on billions of dollars’ worth of capital equipment that needs to be running at or near full capacity to produce profits.  Just a difference in perspective.

There has been some cautionary talk among some in the display supply chain about the possibility that the rapid panel price increases seen over the last year might slow or even decline over the next few months.  Those in that camp cite component shortages, double ordering, and COVID-19 outbreaks as the root cause, while the rest of the industry nods quietly during such discussions but indicates that those factors have not affected their business and expectations remain unchanged.  While we do not expect the outlook for panel prices to fall off a cliff, we do expect less panel price increase momentum as we have stated previously.
Our expectations for August panel prices indicate that IT products, primarily notebooks and monitors, will continue to see upward panel price movement, but TV panel prices, depending on size, will see some price declines.  Since we aggregate panel prices, both from a number of sources and by size, the overall panel price movement can belie the fact that some panel sizes can see price increase while the aggregate price is negative.  This is a normal occurrence in many panel categories, however it become consequential when there is a change in momentum, as we believe is currently afoot.   In the TV space, smaller TV panel (32” to 55”) prices are expected to decline, while larger (65” and above) are expected to rise, as the consumer’s quest for larger TVs continues, while smaller TVs, more common in developing markets, are more easily produced and are offered by a large number of panel producers.
As to the real reasoning behind this change in panel pricing perspective, while component shortages can limit panel output, the underlying demand is the true driver for panel pricing, and while demand for IT products remains relatively strong currently, TV demand has been weakening as the COVID-19 vaccines have begun to ease concerns about venturing outside and away from a TV screen.  Right now this is an iffy proposition, as the ebb and flow of COVID-19 can push sentiment in one direction or another, but the general focus, at least in most developed countries is that life is, at the least, trying to return to normal, which helps to break the bonds of TV binging. 
Notebooks still have yet to see demand slow, although some of the county-wide educational programs that have created such demand are beginning to tail off as students begin to repopulate classrooms.  We expect this will be the last display category to tail off, as the results of bringing students back to classrooms won’t be known until September or October, but monitors, for which demand has also remained strong, would be the segment that we expect could see some weakness over the next few months, with returning office workers offsetting some of the weaker stay-at-home demand.
From the supply side, while we expect capacity utilization to remain relatively high as we enter the seasonal build period, we have seen a more enthusiastic view of capacity additions from a number of panel producers in recent months.  Whether this is a result of being profitable for the last few quarters or a continuing need to dominate a particular display category, we do not know, and most of the proposed capacity increases, at least in the LCD space, are relatively small, or have been underway for more than a year. 
That said, while the capacity issue is certainly one we watch closely, the fact that most large panel producers have been shifting capacity away from TV panel production and increasing their IT panel output.  This is a logical move as IT panel demand remains visible while TV demand is less so.  IT panel products also tend to be more profitable on a per m2 basis, and the model variety is greater than the TV space, leading to a bit less head-to-head price competition and more specialized feature selection which leads to higher prices, but the shift toward IT panel production also carries significant risk when IT panel prices begin to weaken and utilization rates begin to decline.  We expect that IT panel buyers, who have been on the wrong side of the bargaining table for a year, will push to regain their negotiating leverage and panel producers will respond by quickly lowering prices.
None of this will happen in an instant, especially as we are entering the seasonal build period when panel demand is typically highest, but both panel and component price increases that have become almost normal across the CE space also add to that risk as consumers are less in need of immediate gratification and more willing to wait for more reasonable device prices.  Panel producers will not panic even when they see some order cancellations or cut backs, but when they are unable to fill that open capacity with new orders they will start making deals to keep fab utilization from falling.  They have yet to face that situation, but it is more of a ‘when’ than an ‘if’ situation in our view.

Innolux (3481.TT) announced that it had signed a long-term supply deal with Sakai Display Products (pvt), the company that owns the formerly Sharp (6753.JP) Gen 10.5 LCD fab in Japan.  Innolux will pre-pay in installments, the $618m price of the 12 year deal through its subsidiary Foshan Optoelectronics (pvt).  Behind the concept of the deal is eliminating the cost of building a greenfield Gen 10.5 fab, which would likely cost between $1.9b and $3.3b for each 30,000 sheet/month line, of which there would likely be two.  Innolux currently runs one Gen 7.5 and two Gen 8 LCD fabs, with the Gen 7.5 fab most efficient at producing panels in the 42” to 46” range, and the Gen 8 fabs most efficient producing 55” panels, with TV panels representing 38% of Innolux’s 2Q sales.  However, as consumers look toward larger size TVs, the Innolux fabs become far less efficient at sizes of 65” and larger.  This has pushed Innolux to decide whether it would be more cost effective to build its own Gen 10.5 fab or sign a deal with Sakai Display, who runs a Gen 10.5 fab that has been in operation since 2009.
The decision is made a bit more obvious due to the fact that Sakai Display Products is owned by Terry Gou, the Chairman of Hon Hai (2317.TT aka Foxconn (2354.TT)), with the company owning a controlling stake in both Sharp and Innolux, so the deal is sort of an ‘all-in-the-family’ one that benefits all parties to some degree and Terry Gou in quite a few of them.  Sakai is expected to increase its capacity from 90,000 sheets/month to 120,000 and eventually to 150,000, but no timetable has been given and Foxconn has a long history of making promises and not fulfilling them, so we maintain our model at current capacity until we get confirmation that new lines have been added and are operating.  If such an expansion does become a reality will Mr. Gou provide the financing or will the capital be drawn from some other related entity?

​Chinastar (pvt), a subsidiary of parent TCL (000100.CH) has indicated that it expects its latest LCD fab project, T9 to achieve mass production earlier than expected.  The original plan for the fab was to begin mass production in early 2023, which the COO now believes will take place before the end of 2022, a pull in of at least three months based on their schedule.  The new fab has a planned capacity of 120,000 sheets/month using a 2250 x 2600 sheet format (Gen 8.5) and has been designed to produce IT products using an IGZO backplane, a technology that Chinastar has considerable experience with.
While we had originally modeled April 2023 at the start date for the fab, we had planned for only relatively small production until July ’23.  With the expected pull-in, we move the start date to October 2022 and a serious ramp beginning in January 2023. , and additional lines scheduled in 2023 and 2024.  While pull-ins and push-outs are fairly common in the display space, we expect the optimistic view that panel producers have developed over the last year, a result of the rapid increase in large panel prices, will push timelines on new capacity projects further.  While large panel prices may flatten and even decline, most panel producers remain in a profitable position, and the mindset does not change easily when profits are accumulating.
That said, big capacity projects like T9 can have a significant impact on the supply/demand curve and as such projects enter production overall production utilization can take a hit.  If the IT panel market shows any signs of a real demand slowdown, and not one caused by shortages or the end of a shortage cycle, it will take some time before panel producers are willing to change their capacity increase schedules, and the industry could easily settle back into its more typical boom/bust pattern.  Many panel producers believe its different this time due to COVID-19, which we admit has been true, but human nature is such that it reverts back to norms as soon as possible.  Whether that is later this year or next will impact those decisions but not until it is likely too late to make substantial changes.  Alea iacta est – loosely translated, passed the point of no return…

Suddenly display prognosticators have changed their tune.  While panel price increases have lessened over the last few months, August is shaping up to be the first month where some panel prices will decline, although there seems to be considerable disagreement as to by how much.  Monitor and Notebook panel prices are still likely to increase, but TV panel prices will not and again with considerable differences between the amounts, the trend is decidedly different than in previous months, and while negotiations between panel buyers and panel producers continue, we notice that even over the last week, TV panel price estimates have declined a bit further.
Accurate panel prices are almost an impossibility as there are so many types in each panel size category, so our angle has always been to average as much of the data as possible to come up with a more normalized price.  This is especially helpful when the spread between low and high panel prices for each size increases, a result of both customer allocation at the producer level and double ordering.   While the spread had narrowed for many panel types and sizes in 2Q, the spread is beginning to widen again, indicating less buyer willingness to accede to the price demands of panel producers. 
That said, experience says when panels have been in relatively short supply, smaller purchasers tend to get allocations below targets, so when demand from large customers begins to slow, panel producers can fill those smaller customers and extend a high level of utilization despite lower demand.  We expect this was the case in July and could help to insulate panel producers from the effects of weaker demand for a month or so, but the sustainability of such a situation is poor and those producers focused on TV panel production will take the hit relatively quickly.
As this month there seem to be an inordinate number of panel price prognosticators willing to share their thoughts as to August panel pricing, we have put together early averages, although we expect they will change quickly as rumor and innuendo about orders circulate further.

In March (3/15/21), (3/16/21) we noted a number of supply/demand scenarios that built out our data on unit volumes for a number of CE products.  While this exercise was more of an attempt to correlate a number of data sources, it turned out to be far more focused on demand than supply, given the unusual circumstances that the COVID-19 pandemic has caused.  Now that we have actual data for the first two quarters of the year, we went back to see how each of the four scenarios performed, with the purpose not of proving whether we were right or wrong but to try to assess whether the 1st half results actually fit into any ‘normal’ scenarios.
The demand data was constructed from four CE categories, notebooks, monitors, TVs, and tablets, which encompasses almost all of large panel display production.  Smartphones, AR/VR, watches, and most foldable devices are not in the calculations as they are considered ‘small panel’ devices that are produced under their own demand characteristics.  Small panel production in terms of units, represents between 65% and 72% of the total, but between only 16% and 19% of panel revenue, and despite the high unit volumes, is a small part of total panel area, with TV representing ~70% of panel production area.
Each of the supply/demand scenarios was based on 2020 data and seasonal norms and then tweaked by adjusting the ratios.  The four scenarios were named according to the balance between supply and demand and the outlook each schema had on a quarterly basis.  In this note we are only looking at the demand side of the scenario, although the results below reflect the performance of the entire scenario.

In terms of unit volumes, the best of the four scenarios was low by 3.7% and the worst low by 21.3%, with all four predicting unit volume lower than actual 1H unit volumes.  There was no consistency in 1Q/2Q results in the scenarios, with two performing better in 1Q and two in 2Q.  Scenario 4 (Avalanche), which represented a steep drop in demand resulting in a substantial capacity oversupply, performed the worst across the board, but performed the best in the TV category specifically, predicting shipments within 1% and 2% of actual results in 1Q and 2Q respectively, while seriously underestimating shipments in all other device categories.  Scenario 1 (Slow Burn), which represented slightly weaker demand and modest oversupply in capacity, predicted monitor unit volume the most accurately, within 2.5% to 3.2% of actual, but joined all three other scenarios in mis-forecasting notebook unit volume.  The table below summarizes the results with each scenario.

​In terms of these scenarios, while we certainly look at the monthly and quarterly results, these scenarios were built around full year results, and we expect 2H to be both different from 1H and different from the ‘typical’ 2H, so we reserve judgement on how well the scenarios performed until we have full year data.  That said, on a general basis we underestimated the strength of demand in the 1st half, particularly with notebooks, which have continued to outperform our expectations as to unit volumes, but the 2nd half presents its own challenges, some of which are a continuation of those seen in the 1st half and others are new, such as the potential for declining TV panel prices.  We will update again after we have actual 3Q data, but being off by 16.4m panels out of 441.4m is not too bad…

There was one statistic that stood out in June concerning the large panel display market.  June was the first month that saw negative y/y large panel shipment comparisons since March of 2020, 15 months ago.  While this is not something unexpected, as we have noted the potential for this occurrence a number of times, we had been expecting such comparisons to go negative first in July.  June display industry sales came in at $7.47t US, 3.25% lower than our expectation but still up 42.6% y/y, and while large panel ASP’s have been rising since last May, June was the first month where they saw a decline, albeit a small one, down 0.1% with the average large panel ASP monthly increase being 3.6% this year and 3.2% over the last 12 months. 
We expect panel producers will pass off the shipment and ASP issues as a function of component shortages which have limited shipments, but while we believe there are certainly component shortages that are limiting panel shipments, it is very difficult to discern whether a change in demand has also affected both industry characteristics in June.  As we noted above, we would have expected slower shipments in July, but not a lower ASP as we had expected overall panel prices to continue to rise, albeit at a slower rate than in the past year.  

Panel prices rose in June, as we previously noted, but are expected to see more modest increases this month, as indicated below, with TV prices almost flat.  We expect large panel shipments to be flat to down in July, which will put additional pressure on panel producer results, particularly TV panels.  While there could be an improvement in shipments in August as back-to-school inventory buys might be needed, both component shortages and seasonally slow summer sales will likely keep the potential increase to a minimum.  That said, we do expect modest price increases for notebooks and monitors, in August but not for TVs, which would keep large panel display sales flat for many panel producers.
In June many large panel producers saw negative m/m sales growth, with AU Optronics (AUOTY) in Taiwan, and Chinastar (pvt), HKC (0248.HK), and CHOT (pvt) in China, the exceptions.  The purchase of Samsung’s (005930.KS) Suzhou LCD fab is helping Chinastar’s sales, and both HKC and CHOT are expanding capacity, however BOE (200725.CH), China’s largest LCD panel producer saw negative m/m growth in sales, similar to South Korean and Taiwan large panel producers, and we would expect those trends to continue into this month.  We exclude those panel producers that are primarily small panel focused.